A Hewlett-Packard due-diligence team was told of allegations of improper accounting at British software maker Autonomy Corp. before HP made the ill-fated $11 billion acquisition. But the outside auditors who mentioned these charges also dismissed them as baseless, and the due-diligence team never mentioned the whiff of impropriety to HP's board.

This account, reported Tuesday by The Wall Street Journal paints a picture of missed chances, lapses in oversight and hasty decision making at HP in the days leading up to a October 2011 acquisition that has taken its toll on the company's finances and reputation. Autonomy is now at the center of an accounting scandal in which HP alleges that the company failed to disclose liabilities and misrepresented its value before the deal. In November, HP wrote down Autonomy's value by $5 billion.

The crux of the The Wall Street Journal account is attributed to unnamed sources close to the deal who say that a due-diligence team including executives from HP and its accounting firm, KPMG, spoke by telephone to a group from Autonomy's outside auditor, the U.K. affiliate of Deloitte Touche Tohmatsu, after the deal had been announced but had yet to be finalized. The Deloitte team mentioned that an Autonomy finance executive had alleged improper accounting at Autonomy 18 months earlier, but the auditors also said a review had found the allegations to be baseless, The Wall Street Journal reported. The HP team didn't investigate or share the information with then-CEO Leo Apotheker or HP's board, according to the paper's sources.

The auditors named in this account have a different version of the truth. KPMG told The Wall Street Journal that all information disclosed to it was "equally disclosed to HP." Deloitte declined comment on this latest story, but in November it categorically denied it had "any knowledge of any accounting improprieties or misrepresentations in Autonomy's financial statements."

HP's board, which at the time had eight of 13 members with less than one year of experience on that body, was in the throes of several weighty decisions including the possible spinout of the company's $40 billion personal computer business. The board was split into two teams to address the Autonomy deal and hardware spinout separately, and the account suggests this approach diminished scrutiny and dissent.
HP executives including chief financial officer Cathie Lesjak opposed the Autonomy deal as too expensive, according to The Wall Street Journal, but chairman Ray Lane, Apotheker and strategy chief Shane Robison were advocates and championed the deal even as the cost of acquisition surpassed seven times annual revenue and 15 times operating profit.

Had HP senior management caught wind of financial improprieties, it might have had cause to abandon the deal. But once again HP's board was swamped with other matters, as it had dismissed Apotheker in September 2011 and sworn off a hardware spinout in the face of a shareholder revolt. At this point, Lane asked financial advisers if HP could back out of the Autonomy deal, The Wall Street Journal reports, but he was told that U.K. takeover rules "made that impossible unless HP could show financial impropriety."

Among the many jaw-dropping insights in The Wall Street Journal's account is that HP's board and executive management learned that "bloggers and some financial analysts had claimed in the past that Autonomy was aggressive in its accounting" only after shareholders raised their opposition to the deal. And considering HP went far beyond its original financial terms, it seems as if the company turned a blind eye to everything including the numbers in its quest to add enterprise software to its technology portfolio.

With HP's write down, Autonomy's value is now close to its pre-acquisition market value of $6 billion. HP has even received offers for Autonomy, as reported last week. But even a hasty sale of Autonomy will not relieve HP of the financial woes or the legal distractions tied to the acquisition that will likely linger for years to come.